Integrating Evoqua And Investing In Idrica Will Streamline Operations And Strengthen Key Segments

Key Takeaways

• Successful integration of Evoqua acquisition and strategic investment in Idrica enhance margins and earnings, boosting key segments.
  
• Operational improvements and initiatives streamline operations and expand margins amid strong order growth, indicating future revenue potential.
  
• Delays and integration challenges may impact Xylem's revenue growth, with risks from economic uncertainties and operational complexities affecting margins and earnings targets.

Catalysts

Engages in the design, manufacture, and servicing of engineered products and solutions worldwide.

• Successful integration and synergies from the Evoqua acquisition, resulting in expected cost synergies of $130 million by 2024, which could enhance net margins and improve earnings.
  
• Strategic investment in Idrica, a leader in data management and analytics for water utilities, expected to enhance Xylem's Measurement & Control Solutions segment, potentially boosting revenue and earnings.
  
• The operational discipline and productivity improvements positioned to drive record EBITDA margin of 20.5%, despite lower revenue growth, indicating potential for margin expansion.
  
• Strong backlog and book-to-bill ratio exceeding 1, with healthy orders growth in MCS and Water Infrastructure segments, suggesting upward trajectory in future revenue.
  
• Implementation of 80/20 initiative and simplification efforts expected to streamline operations, reduce costs, and contribute to net margin expansion over time.

Xylem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Xylem's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 12.8% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $5.26) by about December 2027, up from $830.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.3x on those 2027 earnings, down from 35.3x today. This future PE is greater than the current PE for the US Machinery industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 0.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Xylem Future Earnings Per Share Growth

Risks

• Delays in project timing and softening demand in some segments (e.g., mining across Europe and emerging markets) could challenge revenue growth expectations, potentially impacting overall earnings targets.
  
• Continued project delays, especially in Water Solutions and Services (WSS) and Measurement & Control Solutions (MCS), might lead to a slower-than-anticipated revenue realization, affecting short-term revenue and bottom-line growth.
  
• Potential risks from economic uncertainty in China and the Middle East could impact Xylem's international revenue, given the tight liquidity and real estate issues that may lead to postponements or reductions in project scopes.
  
• While order growth remains healthy, moderated revenue growth due to challenging year-over-year comparisons might strain overall revenue growth expectations and net margins.
  
• Execution risks related to the integration of Evoqua and expansion into new markets like Idrica could increase operational complexity, potentially impacting net margins if synergy and scale efficiencies are not realized as expected.

Valuation

• The analysts have a consensus price target of $147.71 for Xylem based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $166.0, and the most bearish reporting a price target of just $113.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.8 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 34.3x, assuming you use a discount rate of 6.9%.
• Given the current share price of $120.77, the analyst's price target of $147.71 is 18.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.